Datadog (NASDAQ:DDOG) has been one of the breakout winners among cloud stocks this year. The software-as-a-service (SaaS) provider of an infrastructure monitoring and analytics platform has jumped about 140% this year and has more than tripled since its bottom during the market crash in March.

The stock surged after a blowout first-quarter earnings report that included revenue growth of 87% to $131 million, and the company saw its base of larger customers (those generating more than $100,000 in annual recurring revenue) nearly double from a year ago.  

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While it's easy to see why investors would be excited about a cloud stock nearly doubling revenue, Datadog's valuation has gotten stretched after the recent rally as it trades at a steep price-to-sales ratio of about 50 based on this year's guidance, and the company is only expecting a minimal profit this year.

Investors looking for other options in the sector may want to consider one of Datadog's peers, Dynatrace (NYSE:DT), a cloud-based software intelligence provider, whose performance has nearly matched Datadog since that company's IPO last year.

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Dynatrace isn't growing as fast as Datadog, but brings in more revenue, is solidly profitable, and is trading at a more reasonable price-to-sales ratio of less than 20 based on guidance for the year. It also has a forward P/E ratio of around 80.

What is Dynatrace?

Dynatrace's business is built around its AI-driven software intelligence platform. That platform provides real-time notifications and solutions to problems that arise across the software stack and the underlying multicloud infrastructure. These issues include application performanceand the experience of customers' end users.

The service, which is focused on enterprises generating more than $1 billion in annual revenue, helps ensure that mission-critical applications stay online. The company draws customers from a wide range of industries including banking, logistics, retail, and healthcare, and its customers include the likes of MGMNational Grid, and Santander.

Dynatrace's focus on large companies, including those in the Global 2000, limits the competition it faces because barriers to entry are higher when dealing with bigger companies. CEO John Van Siclen explained that the scale and complexity of a company's tech needs grow as they get bigger and requirements are more demanding. The company currently has 2,400 enterprise customers with the average one contributing $229,000 in annual recurring revenue. And it's targeting a pool of about 15,000 customers, since that's how many firms Van Siclen said have more than $1 billion in revenue.

As the digital transformation in business continues, demand for Dynatrace's services should steadily increase, and the company estimates its total addressable market to be worth $20 billion to $30 billion. In fact, the market for such software and infrastructure monitoring services is big enough that Van Siclen doesn't consider Datadog to be a direct competitor, saying the companies operate in different lanes, though Datadog is listed among its competitors in its prospectus.

In its first quarter, which ended in June, Dynatrace saw solid growth with reported revenue up 27%, or 30% on a constant currency basis, to $155.5 million, while annual recurring revenue jumped 37%, or 39% in constant currency, to $601.4 million. Nearly all of the company's revenue comes from subscriptions, generally in one- or three-year contracts, giving it a reliable revenue stream that can act as a buffer in a recession.

Operating expenses on a generally accepted accounting principles (GAAP) basis fell in the quarter largely due to lower share-based compensation, and the company finished with adjusted earnings per share of $0.13. 

Management also raised its guidance for the year, calling for constant-currency revenue growth of 20% to 22%, to $646 million to $656 million, and adjusted earnings per share of $0.46 to $0.49. 

What the future holds

Like much of the cloud sector, Dynatrace has demonstrated its resilience during the pandemic, and Van Siclen believes the crisis will accelerate the digital transformation and migration to more-advanced cloud technologies, supporting the company's long-term growth. Gartner estimates that enterprises will quadruple their use of application performance management (APM) from 2018 to 2021 to reach 20% of all business applications, and the IT research firm considers Dynatrace a leader in the APM category.  As APM adoption grows, so will Dynatrace's market opportunity.

With solid revenue growth, a net expansion rate around 120%, a wide profit margin, gross margin at 85%, and an expected free cash flow margin around 30% this year, it's hard to find fault with Dynatrace. For investors looking for a reliable cloud stock with long-term growth potential, the software intelligence specialist looks like a good bet.